Category: Securities Exchange Commission

SEC Answers Questions On Title II Crowdfunding

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Investing, Investor, JOBS Act, Rule 506, Securities Exchange Commission, Title II CrowdfundingLeave a comment

On January 23, 2014, the SEC issued two Securities Act Rules “compliance and disclosure interpretations” regarding Title II Crowdfunding. Both of the new C&DIs provide transition guidance for Rule 506 offerings that started before September 23, 2013, the effective date of the new Rule 506(c) exemption.

Question 260.33: An issuer commenced an offering in reliance on Rule 506 before September 23, 2013, the effective date of the new Rule 506(c) exemption.  The issuer decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415 (July 10, 2013).  In such circumstances, is the issuer required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c)?

Answer: No.  For an offering that commenced before September 23, 2013 and that, pursuant to the Commission’s transition guidance, the issuer continues in accordance with Rule 506(c) after that date, the issuer must take reasonable steps to verify the accredited investor status of only investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c).  The issuer must amend any previously-filed Form D to indicate its reliance on the Rule 506(c) exemption for its offering.  See Securities Act Rules C&DI 260.05.

Question 260.34: An issuer commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415 (July 10, 2013), became Rule 506(b).  The issuer now wishes to continue the offering in reliance on Rule 506(c).  Can the issuer rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption?

Answer: Yes, as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers.

While these C&DIs are important for issuers caught mid-stream when Title II Crowdfunding came into effect, the more general message is that the SEC continues to be quite lenient toward Crowdfunding. On both of these questions the decision could have gone the other way, but the SEC chose to make life easier.

Questions? Let me know.

SEC Takes Different Approaches On Title II And Title III

On By crowdfundattnyIn Investing, Investor, JOBS Act, SEC, Securities Exchange Commission, Title II Crowdfunding, Title III CrowdfundingLeave a comment

If you didn’t know better, you might think the Title II Crowdfunding regulations and the Title III Crowdfunding regulations were written by two different agencies.

On one hand, the Title II regulations take a decidedly hands-off approach to the Crowdfunding marketplace. For example:

  • Title II Portals are required only to take “reasonable steps” to ensure that investors are accredited.
  • Issuers are not required to provide any particular information to prospective investors, not even any particular financial information.
  • Title II Portals are not obligated to register with the SEC.

Recall that in the first version of the Title II regulations, the SEC didn’t even include safe harbors for determining whether an investor is accredited. The safe harbors were added only after a public uproar demanding more rules from the SEC (and thus, from the government).

Even after the addition of the safe harbors, there are many, many questions that the Title II regulations don’t even address. Operating in laissez-faire mode, the SEC has left the answers to the marketplace and to the courts.

On the other hand, the Title III regulations – all 585 pages of them, including the preambles – impose stringent and detailed requirements on issuers and portals alike. For example:

  • Title III portals are required to register with the SEC.
  • Title III portals are required to perform detailed background checks on every issuer and its directors, officers, and significant shareholders.
  • Title III portals must deny access to any issuer if the portal believes the issuer “presents the potential for fraud or otherwise raises concerns regarding investor protection,” or if the portal is unable to adequately or effectively assess the risk.
  • Title III issuers are required to provide reams of information to the investing public, including:
  • The business and employment history of all its directors and officers for the previous three years.
  • The reasons why the investment is risky.
  • How the securities were valued.
  • The names of everyone who owns more than 20% of the stock.
  • An explanation how investors could be affected by the exercise of rights by the principals.
  • An explanation of the capital structure.
  • How the money from investors will be used.
    • Detailed information must be provided not only up front, but on an annual basis.
    • After subscribing, Title III investors are given the right to change their minds up to 48 hours before closing.

The Title III regulations, in fact, create a regulatory scheme that has far more in common with the rules that apply to publicly-traded companies than with the laissez-faire approach of the Title II regulations. The main question about the Title III regulations is whether they are so burdensome that they will snuff out Title III Crowdfunding before it begins.

Did different government agencies create the Title II and Title III regulations? Obviously not. The chasm between Title II and Title III can be explained by one fact:  Title II investors are all accredited (for individuals, income of at least $200,000 or net worth of at least $1 million) while Title III investors can be anyone. The assumption behind the regulations is that wealthier people can take care of themselves while those of modest means need the paternalistic protection of the government.

It’s a theme that has run through U.S. securities laws for a long, long time. We’ll see how well it works for Crowdfunding.

Questions? Let me know.

JOBS Act Crowdfunding – The Latest News & Information

On By crowdfundattnyIn Crowdfunding, Crowdfunding Speaking Engagements, JOBS Act, SEC, Securities Exchange CommissionLeave a comment

I have been asked by the Pennsylvania Bar Institute (PBI) to lead a Crowdfunding breakout session at their annual Business Lawyers’ Institute in Philadelphia on November 13th.

I will discuss the latest news and information on JOBS Act Crowdfunding, including: Proposed Title III Crowdfunding Rroegulations; Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

For additional information on this event, or to register, click here.

Questions? Let me know.

MARK RODERICK

Proposed Title III Crowdfunding Regulations: Better Late than Never

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Entrepreneurs, Investing, Investor, JOBS Act, Securities Exchange Commission, Securities Laws, Title III CrowdfundingLeave a comment

On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.

There are two extremely important things about the proposed regulations:

  • That they were issued. After a 90 day public comment period, it seems likely that Title III Crowdfunding will finally come into effect in the first quarter of 2014.
  • That they run to almost 600 pages. Given the complexity, there is some question whether, in the end, a company trying to raise money will find Title III Crowdfunding worthwhile.

Recall that the JOBS Act provides for two kinds of Crowdfunding:

  • Title II Crowdfunding allows companies to raise an unlimited amount of money from an unlimited number of accredited investors using general soliciting and advertising. That kind of Crowdfunding came into effect on September 23, 2013 and is now in full swing.
  • Title III Crowdfunding is a different animal. It allows companies to:
    • Raise up to $1 million per year;
    • On an SEC-registered internet portal;
    • From a unlimited number of investors who do not have to be accredited;
    • But with strict limits on the amount each investor can invest.

For a detailed outline of the Title III statute itself, click here.

Despite their length, the proposed regulations do not add much to the statute. There are just a few points worth noting for a company looking to raise money:

  • The company can use only one portal at a time.
  • The company must file information via EDGAR, the SEC’s electronic database.
  • The $1 million-per-year limit applies only to money raised in Title III offerings. Thus, a company could raise $3 million in a traditional private placement (or a Title II offering) while still raising $1 million in a Title III offering.
  • Investors can change their minds up to 48 hours before the investment deadline, in all circumstances, and must also be given the right to terminate in the event of a material change in the investment opportunity.
  • The company must disclose not only its own prior offerings, but the prior offerings in which its directors and other principals were involved.
  • The SEC has created a new Form C to report Title III offerings.
  • The company may advertise, but only to direct potential investors to the portal’s website. The company may not use general solicitation and advertising, as it can in a Title II offering.
  • “Bad actors” are excluded from Title III Crowdfunding, as they are from Title II Crowdfunding.

The proposed regulations are even more important for portals, or would-be portals. The portal is designated as the virtual policeman for ensuring compliance with the law. For example, the proposed regulations provide that the portal must have a reasonable basis for believing that company is complying with the law, and must deny access to the issuer under certain circumstances. In effect, the portal is required to act as an arm of the SEC itself.

Just as a company trying to raise money might decide that Title III is too onerous, an entrepreneur thinking about forming a Title III portal might decide that the fruit are a little too high and a little too green.

Questions? Let me know.

SEC Proposes For Title III Crowdfunding

On By crowdfundattnyIn Entrepreneurs, Investing, Investor, JOBS Act, SEC, Securities Exchange Commission, Securities Laws, Title III CrowdfundingLeave a comment

Today, at long last, the SEC issued proposed regulations implementing Title III Crowdfunding, which will allow companies to raise up to $1 million per year in small increments from non-accredited investors.

With commentary, the proposed regulations run to almost 600 pages. We’ll be posting a summary soon.

Title II Crowdfunding has been live since September 23, 2013. The era of Crowdfunding is now.

Stay tuned for more updates…

Questions? Let me know.

Free Seminar – Smart Talk: Crowdfunding 101

On By crowdfundattnyIn Crowdfunding, Crowdfunding Speaking Engagements, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the University City Science Center in Philadelphia, PA to be the featured speaker on Crowdfunding at the “Smart Talk – Crowdfunding 101” seminar on October 24, 2013.

I will discuss the basic changes to the JOBS Act and what this means for you and your company’s future, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

The seminar will take place on Thursday, October 24, 2013 at the Quorum at the University City Science Center in Philadelphia, PA from 8:30 – 10:00 a.m. This event is free, but space is limited, so you must register to attend. To register, email the University City Science Center to secure a seat. For additional information on the event, click here.

I hope to see you there!

MARK RODERICK

Will The SEC’s 15 Day Notification Rule End Angel Fairs?

On By crowdfundattnyIn Angel Fairs, AngelList, Crowdfunding, FundersClub, General Solicitation, Regulation D offerings, Rule 506, SEC, Securities Exchange CommissionLeave a comment

No, it won’t.

On July 10, 2013 the SEC proposed rules that would, among other things, require a company to notify the SEC at least 15 days before using any “general solicitation” to raise money under the newly-adopted Rule 506(c) of Regulation D, also known as Title II Crowdfunding.

This proposal triggered more anxiety in the investment community than any other. Angel groups in particular were concerned about the possible effect on “angel fairs” and similar networking events, where companies look for investors and publicity by making presentations and handing out literature. If these activities constituted general solicitation, so the thinking went, and a company had not notified the SEC at least 15 days in advance, the company would be violating the law with potentially serious consequences.

Should companies stop presenting at angel fairs? Should attendance at angel fairs be limited? Would the SEC rule bring a wrenching halt to the way startups have raised money for 30 years?

There are two reasons why the concerns in the investment community are probably overblown.

First, “general solicitation” is not a new concept. Regulation D has always prohibited general solicitation. Rule 506 of Regulation D is itself a regulatory implementation of section 4(a)(2) of the Securities Act of 1933, which provides simply that the registration requirements do not apply to “transactions by an issuer not involving any public offering.” It has always been the position of the SEC, reflected in Rule 502(c), that using general solicitation to attract investors crossed the indistinct line from “private offering” to “public offering.”

Thus, every angel fair that has ever been held for the last several decades has been subject to the SEC prohibition on general solicitation. Yet given all that time and all those opportunities, the SEC has never taken the position that what happens at angel fairs constitutes prohibited general solicitation.

Having stood aside and permitted angel fairs for three decades, it seems unlikely that the SEC would take the opposite position today, after Congress announces its support for Crowdfunding by enacting the JOBS Act!

So far, it is safe to say that the SEC has taken the opposite approach, i.e., by making Crowdfunding easier, not more difficult. Consider, for example, the two no-action letters issued by the SEC on March 26, 2013 to FundersClub and AngelList. It seems very possible, even likely, that these letters would not have been issued before enactment of the JOBS Act. The SEC seems to have taken the wishes of Congress to heart and there is no reason to believe it intended to do otherwise with the 15 day proposal.

The other reason the concerns are overblown is that the rule in question is not yet in effect. The public comment period ended on September 23, 2013 and the SEC is considering the many comments made by the investment community. The chances are very high that when the SEC issues the final rule, these comments will be taken into account.

Maybe I’ll be proven wrong. Maybe the SEC will suddenly reverse course after 30 years and issue final rules that blow angel fairs out of the water, throw up unnecessary impediments to Crowdfunding despite the JOBS Act, and make everyone angry. Don’t bet on it.

Questions? Let me know.

Crowdfunding – A Monumental Change in Securities Law

On By crowdfundattnyIn Crowdfunding, Form D, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the New Jersey Institute of Continuing Legal Education to present a webinar on the recent change of Crowdfunding rules. The program will take place on Wednesday, October 9, 2013 and has been approved for CLE credits.  For additional information on the webinar, or to register, click here.

More info: Crowdfunding – A Monumental Change in Securities Law

Now, for the first time, small companies and entrepreneurs will be able to raise money directly from the public using newspaper advertisements, Facebook pages, and other means of “general solicitation,” without going through brokers or other middlemen.

My presentation, entitled “A Monumental Change in Securities Law: Crowdfunding is Now Open for Business,” will discuss the basic changes to the law, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

I concentrate my practice on the representation of entrepreneurs and their businesses. I represent companies across a wide range of industries, including technology, real estate, and healthcare. I am also spearheading my firm’s Crowdfunding Practice.

Check back frequently for information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business.

Questions? Let me know.

A Legal Structure for Crowdfunding

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Entrepreneurs, Financings, Investing, JOBS Act, SEC, Securities Exchange CommissionLeave a comment

It’s official:  Crowdfunding is now in effect and thousands of companies are about to start raising money under the new SEC regulations. If each company offers different deal terms for investors, it’s going to be that much more difficult for investors to make apples-to-apples investment decisions.

Meanwhile, some in the investment community are still concerned that a company raising money through Crowdfunding will be hobbled in raising more money afterward, e.g., from angel groups or venture capital funds.

The sooner the market adopts a standard investment structure, the better for all.

Here is a legal structure that would standardize the Crowdfunding market, satisfy SEC regulations, and ensure that the Crowdfunding round of financing does not preclude later rounds:

  • New Entity:  Form a new entity for the Crowdfunding investors. We’ll call this entity InvestCo, and we’ll call the operating company itself MyCo. InvestCo will be one owner of MyCo, no matter how many investors buy stock in InvestCo.
  • Structure of InvestCo:  InvestCo will be either a limited liability company or a C corporation, based on tax and state-law considerations. InvestCo will be controlled by the same individuals who control MyCo.
  • Percentage Ownership:  Each investor will own a pro rata share of InvestCo based on his or her investment. InvestCo, in turn, will own a percentage of MyCo stipulated by MyCo in the offering materials, based on the amount of money raised and the value of MyCo. Here is a post with suggestions on establishing this ownership percentage.
  • Voting Rights of Investors:  Investors will not be entitled to vote in InvestCo, and InvestCo will not be entitled to vote in MyCo. That is, the investors in a Crowdfunded offering will have no voting rights, except the right to appoint one member to the Board of Directors of MyCo.
  • Preference on Sale or Liquidation:  If MyCo is sold or liquidated, InvestCo will be entitled to receive a return of its investment before any distributions are made to the other owners of MyCo as they exist today. If MyCo raises more money in the future, the rights of InvestCo could be subordinated to the rights of the new investors.
  • Dividend Right:  InvestCo’s stock in MyCo will bear a dividend rate of 5%.
  • Tag-Along Rights: If the founder of MyCo sells some of his or her stock, InvestCo will have the right to participate in the sale.
  • Anti-Dilution Rights:  InvestCo will be entitled to “weighted average” anti-dilution protection.
  • Right to Information:  Investors will have the right to basic information from MyCo, such as annual financial statements. Of course, state law may give them (and any other owners) the right to additional information.

This structure should be acceptable to all of the constituents of the Crowdfunding market:  the entrepreneurs who started MyCo; the broad investing public that will make Crowdfunding a success; the angel groups that help so many startups succeed and currently anchor the early-stage market; and the venture capital funds that provide additional funds for companies that need and deserve them.

Questions? Let me know.

SEC Proposes Rules to Track Crowdfunded Offerings

On By crowdfundattnyIn Crowdfunding, FINRA, Form D, General Solicitation, JOBS Act, SEC, Securities Exchange CommissionLeave a comment

Having just allowed the use of advertisements and “general solicitation” to raise money, the SEC now proposes several steps to protect investors and keep track of the explosion in Crowdfunding the new rules are certain to trigger.

Beefing Up Form D

Form D has been around for along time, but now the SEC proposes to beef it up significantly. The company raising money through general solicitation will now have to:

  • File a Form D no later than 15 days before first engaging in general solicitation.
  • File a closing amendment to Form D within 30 days after the offering has been completed or abandoned.
  • Disclose much more information in the Form D, including:
    • Its website address;
    • Specific uses of the proceeds of the offering;
    • The number and types of accredited investors participating in the offering;
    • Whether general solicitation materials were filed with FINRA;
    • The types of general solicitation used or to be used; and
    • Methods used or to be used to verify the accredited investor status of purchasers.

More Legends

The SEC also proposes a number of new legends that must appear in general solicitations, including that the securities can only be sold to accredited investors, that the SEC has not passed on the merits of the offering, that investing entails risk (!), and that past performance does not guaranty future performance.

Sending General Solicitation Material to the SEC

Finally, the SEC proposes that companies must submit their written general solicitation materials to the SEC, on a temporary basis, by no later than the date of first use of the materials. This rule would expire two years after its effective date, presumably giving the SEC enough time to see what is happening in the marketplace and issue a new or different rule as it sees fit.

*     *     *

Unlike the rules allowing general solicitation, these new rules are merely proposals, and could be revised or withdrawn after a 60 day public comment period.

Questions? Let me know.